The Securities and Exchange Commission filed a civil lawsuit against Oleksandr Ieremenko and eight other persons for allegedly conducting an illegal trading scheme that relied on material nonpublic information illicitly obtained through cyberattacks on the SEC’s online Electronic Data Gathering, Analysis, and Retrieval system used by the SEC for receiving and retaining various corporate filings. The SEC charged that the alleged illicit conduct occurred from May through at least October 2016.

In its complaint, filed in a federal court in New Jersey, the SEC alleged that Mr. Ieremenko was the architect of the fraudulent scheme. According to the SEC, he initiated his purportedly nefarious activity in spring 2016 by first sending emails containing malware to addresses that appeared to originate with SEC security personnel. Through this phishing attack, Mr. Ieremenko was able to (1) infect several SEC workstations when some SEC computer users opened emails with the malware; (2) illicitly penetrate the EDGAR system; and ultimately (3) gain access to test filings made by reporting entities on EDGAR, some of which contained nonpublic earnings information that would be publicized by the filing companies in the near future. Mr. Ieremenko then sold some of the earnings information to the other defendants, who bought and sold securities of the filing companies in advance of the public announcements of such information, hoping to benefit from their early knowledge. Ultimately, charged the SEC, this generated at least US $4.1 million in gross illicit gains.

The eight persons named in the SEC’s enforcement action in addition to Mr. Ieremenko were: Capyield Systems, Ltd.; Sungjin Cho, David Kwon, Ivan Olefir, Igor Sabodakha, Andrey Sarafanov, Spirit Trade, Ltd., and Victoria Vorochek. All the defendants were alleged to have ties with either Russia or the Ukraine, except for Mr. Cho and Mr. Kwon whose last known addresses were in California.

All the defendants, except for Spirit Trade and Mr. Kwon, were charged by the SEC in 2015 in connection with a similar cyber intrusion and trading program involving material nonpublic information illegally obtained from newswire services. (Click here for further details in the article “Hackers and Traders Charged by SEC and Department of Justice in International Securities Fraud Scheme” in the August 16, 2015 edition of Bridging the Week.)

In a parallel action, Mr. Ieremenko and Artem Radchenko – who allegedly recruited the parties that traded on the hacked information – were indicted in a criminal action initiated by the Department of Justice. The criminal action covers the defendants’ activities from February 2016 to March 2017.

Among other remedies, the SEC seeks disgorgement and penalties against the defendants. The DOJ seeks fines and imprisonment among other sanctions.

Compliance Weeds: In September 2017, in an innocuous press release entitled “SEC Chairman Clayton Issues Statement on Cybersecurity” the SEC first announced that it had discovered that its EDGAR system was hacked during 2016, and that persons may have profited from trading on unauthorized information obtained through such intrusion. (Click here for details in the article “SEC Discloses Trading May Have Occurred Based on Confidential Information Illicitly Obtained From Hack of EDGAR System in 2016” in the September 24, 2017 edition of Bridging the Week.) At the time, the SEC said that it did not believe that the hacking resulted in the compromise of personally identifiable information. Additionally, the SEC said that the hacking occurred through the test-filing component of the EDGAR system and that the vulnerability that allowed the hacking was patched “promptly after discovery.”

Just a short time later, the SEC acknowledged that, despite its prior understanding, the hack of the EDGAR system compromised two individuals’ personal information. (Click here for more information in the article “SEC Chairman Discloses Personal Information Also Compromised in EDGAR Hack” in the October 8, 2017 edition of Bridging the Week.) Moreover, in its complaint against defendants, it appears that the vulnerability in the EDGAR system that Mr. Ieremenko exploited was not shut down because of a detection of his illicit activity, but because of an unrelated incident. According to the SEC, “In October 2016, SEC IT personnel patched EDGAR software in response to a detected attack on the system, which also had the effect of preventing Ieremenko from accessing test filings” (emphasis added).

As this embarrassing episode at the SEC confirms, it’s not if a cyberattack may occur, it’s when it will occur. Unfortunately the bad folks are too creative and always seem to be one step ahead of the rest of us. As SEC Chairman Jay Clayton said in announcing the SEC enforcement action against the nine defendants, "[n]o system can be entirely safe from a cyber intrusion." (Click here to access Mr. Clayton's full statement on the SEC's enforcement action.)

There are numerous well-publicized measures a financial services firm should take to help reduce the likelihood of a cyberattack, including training (which should include mock phishing exercises). Equally important are the measures a firm should take to respond to a cyberattack, including taking all reasonable measures to understand the nature and scope of an attack and securing systems and data as soon as possible. Key is to have developed in advance a well thought through formal attack response plan and follow it when an attack occurs. Recent publications by the Financial Industry Regulatory Authority and amendments to National Futures Association’s guidance related to Information Systems Security Programs are good starting documents to review to gain better insight into effective cybersecurity measures. (Click here for information regarding the FINRA publication in the article “FINRA Publicizes Effective Practices at Members to Mitigate Cybersecurity Risks” in the January 6, 2019 edition of Bridging the Week, and here regarding NFA’s revised NFA guidance in the article “NFA Proposes Guidance Amendments to Enhance Cybersecurity” in the December 9, 2018 edition of Bridging the Week.)